Cascade Bancorp 10-Q 2010
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the quarterly period ended: September 30, 2010
For the transition period from ________ to __
Commission file number: 0-23322
(Exact name of Registrant as specified in its charter)
1100 N.W. Wall Street
Bend, Oregon 97701
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
¨ Large Accelerated Filer ¨ Accelerated Filer ¨ Non-accelerated Filer x Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 28,538,399 shares of no par value Common Stock as of November 1, 2010.
CASCADE BANCORP & SUBSIDIARY
SEPTEMBER 30, 2010
ITEM 1. FINANCIAL STATEMENTS
Cascade Bancorp & Subsidiary
Condensed Consolidated Balance Sheets
September 30, 2010 and December 31, 2009
(Dollars in thousands)
See accompanying notes.
Cascade Bancorp & Subsidiary
Condensed Consolidated Statements of Operations
Nine Months and Three Months ended September 30, 2010 and 2009
(Dollars in thousands, except per share amounts)
See accompanying notes.
Cascade Bancorp & Subsidiary
Condensed Consolidated Statements of Changes in Stockholders’ Equity
Nine Months Ended September 30, 2010 and 2009
(Dollars in thousands)
See accompanying notes.
Cascade Bancorp & Subsidiary
Condensed Consolidated Statements of Cash Flows
Nine Months ended September 30, 2010 and 2009
(Dollars in thousands)
See accompanying notes.
Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
September 30, 2010
The accompanying interim condensed consolidated financial statements include the accounts of Cascade Bancorp (“Bancorp”), a one bank holding company, and its wholly-owned subsidiary, Bank of the Cascades (the “Bank”) (collectively, “the Company” or “Cascade”). All significant inter-company accounts and transactions have been eliminated in consolidation.
The interim condensed consolidated financial statements have been prepared by the Company without audit and in conformity with accounting principles generally accepted in the United States (GAAP) for interim financial information. Accordingly, certain financial information and footnotes have been omitted or condensed. In the opinion of management, the condensed consolidated financial statements include all necessary adjustments (which are of a normal and recurring nature) for the fair presentation of the results of the interim periods presented. In preparing the condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheets and income and expenses for the periods. Actual results could differ from those estimates. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.
The condensed consolidated financial statements as of and for the year ended December 31, 2009 were derived from audited consolidated financial statements, but do not include all disclosures contained in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2009. The interim condensed consolidated financial statements should be read in conjunction with the December 31, 2009 consolidated financial statements, including the notes thereto, included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2009.
Certain amounts for 2009 have been reclassified to conform with the 2010 presentation.
Investment securities at September 30, 2010 and December 31, 2009 consisted of the following (dollars in thousands):
The following table presents the fair value and gross unrealized losses of the Bank’s investment securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2010 and December 31, 2009 (dollars in thousands):
The unrealized losses on investments in U.S. Agency and non-agency MBS and U.S Agency asset-backed securities are primarily due to elevated yield/rate spreads at September 30, 2010 and December 31, 2009 as compared to yield/spread relationships prevailing at the time specific investment securities were purchased. Management expects the fair value of these investment securities to recover as market volatility lessens, and/or as securities approach their maturity dates. Accordingly, management does not believe that the above gross unrealized losses on investment securities are other-than-temporary. Accordingly, no impairment adjustments have been recorded.
Management intends to hold the investment securities classified as held-to-maturity until they mature, at which time the Company will receive full amortized cost value for such investment securities. Furthermore, as of September 30, 2010, management did not have the intent to sell any of the securities classified as available-for-sale in the table above and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost.
As of September 30, 2010, the carrying value of the Bank’s investment in FHLB stock was $10.5 million and is a condition of membership in the FHLB system and, as such, is required to obtain credit and other services from the FHLB. As of June 30, 2010, the FHLB met all of its regulatory capital requirements, but remained classified as “undercapitalized” by its primary regulator, the Federal Housing Finance Agency (FHFA), due to several factors including the possibility that further declines in the value of its private-label mortgage-backed securities could cause it to fall below its risk-based capital requirements. On October 26, 2010, the FHLB announced that FHLB entered into a Consent Agreement with the FHFA, which requires the FHLB to take certain specified actions related to its business and operations. The FHFA continues to deem the FHLB "undercapitalized" under the FHFA's Prompt Corrective Action rule. Management considers several factors in evaluating impairment including the commitment of the issuer to perform its obligations and to provide services to the Bank. Based upon the foregoing, management has not recorded an impairment of the carrying value of our FHLB stock as of September 30, 2010.
The composition of the loan portfolio at September 30, 2010 and December 31, 2009 was as follows (dollars in thousands):
Total loans continue to be strategically reduced as a result of paydowns, select loan sales or participations, non-renewal of mainly transaction-only loans where the deposit relationship with the related customer was de minimus, as well as net charge-offs (particularly in the residential land development portfolio).
The above loans are net of deferred loan fees of approximately $2.7 million at September 30, 2010 and $3.3 million at December 31, 2009.
Transactions in the reserve for loan losses and unfunded commitments for the nine months ended September 30, 2010 and 2009 were as follows (dollars in thousands):
At September 30, 2010, the Bank had approximately $207.6 million in outstanding commitments to extend credit, compared to approximately $288.7 million at year-end 2009. The reduction is a function of completion of prior period construction draws as well as management’s efforts to reduce commitments to a lower level. Reserves for unfunded commitments are classified as other liabilities in the accompanying condensed consolidated balance sheets.
Risk of nonpayment exists with respect to all loans, which could result in the classification of such loans as non-performing. NPA balances have declined during 2010 compared to the rapid growth experienced in the first half of 2009. While this is a positive development no assurance can be given that NPA’s will not increase in the future. During the three months ended September 30, 2010 certain non performing loans were foreclosed upon resulting in a reduction in non performing loans (NPL’s).
At September 30, 2010, the Company had 22 troubled debt restructurings ("TDRs") totaling $41.4 million, of which $11.5 million is reported as non-accrual loans. At December 31, 2009, the Company’s TDR’s totaled $27.3 million, of which $11.8 million was reported as non-accrual loans. The TDRs at September 30, 2010 and December 31, 2009 are classified as impaired loans and, in the opinion of management, are reserved appropriately.
The following table presents information with respect to NPA’s at September 30, 2010 and December 31, 2009 (dollars in thousands):
The composition of NPA’s as of September 30, 2010, June 30, 2010, March 31, 2010 and December 31, 2009 was as follows (dollars in thousands):
The following table presents non-performing assets as of September 30, 2010, June 30, 2010, March 31, 2010 and December 31, 2009 by region (dollars in thousands):
A loan is considered to be impaired (non-performing) when it is determined probable that the principal and/or interest amounts due will not be collected according to the contractual terms of the loan agreement. Impaired loans are generally carried at the lower of cost or fair value, which may be determined based upon recent independent appraisals which are further reduced for estimated selling costs or as a practical expedient basis by estimating the present value of expected future cash flows, discounted at the loan’s effective interest rate. Certain large groups of smaller balance homogeneous loans, collectively measured for impairment, are excluded. Impaired loans are charged to the reserve for loan losses when management believes after considering economic and business conditions, collection efforts and collateral position that the borrower’s financial condition is such that collection of principal is not probable. See “Footnote 13 – Fair Value Measurements” for additional information related to fair value measurement.
At September 30, 2010, impaired loans carried at fair value totaled approximately $111.3 million and related specific valuation allowances were approximately $6.6 million. At December 31, 2009, impaired loans were approximately $147.6 million and related specific valuation allowances were approximately $0.1 million. Interest income recognized for cash payments received on impaired loans for the periods presented was insignificant. The average recorded investment in impaired loans was approximately $149.3 million and $159.3 million for the nine months ended September 30, 2010 and 2009, respectively.
The accrual of interest on a loan is discontinued when, in management’s judgment, the future collectability of principal or interest is in doubt. Loans placed on non-accrual status may or may not be contractually past due at the time of such determination, and may or may not be secured. When a loan is placed on non-accrual status, it is the Bank’s policy to reverse, and charge against current operations, interest previously accrued on the loan but uncollected. Interest subsequently collected on such loans is credited to loan principal if, in the opinion of management, full collectability of principal is doubtful. Interest income that was reversed and charged against income for the nine months ended September 30, 2010 and 2009, was approximately $0.9 million and $1.6 million, respectively.
Since a significant portion of the Bank’s loans are collateralized by real estate, the Bank primarily measures impairment of such loans based on the estimated fair value of the underlying real estate collateral. OREO is carried at the lower of cost or estimated net realizable value, which is also based on the estimated fair value of the related real estate property. The valuation of real estate collateral and OREO is subjective in nature and may be adjusted in the future because of changes in economic conditions. The valuation of real estate collateral and OREO is also subject to review by Federal and State bank regulatory authorities who may require increases or decreases to carrying amounts based on their evaluation of the information available to them at the time of their examinations of the Bank, in addition to State banking regulations which require periodic mandatory write-downs of OREO. Management considers third-party appraisals, as well as independent fair market value assessments from realtors or persons involved in selling real estate and OREO, in determining the estimated fair value of particular properties. In addition, as certain of these third-party appraisals and independent fair market value assessments are only updated on an annual basis, changes in the values of specific properties may have occurred subsequent to the most recent appraisals. Accordingly, the amounts of any such potential changes – and any related adjustments – are generally recorded at the time such information is received.
The following table presents activity related to OREO for the periods shown (dollars in thousands):
Effective April 30, 2010, the Bank executed an agreement to sell its mortgage servicing assets as previously discussed in the Company’s Quarterly Report on Form 10-Q for the period ending March 31, 2010. Going forward, the Bank will not directly service mortgage loans it originates, but rather sell originations “servicing released”. “Servicing released” means that whoever the Bank sells the loan to will service or arrange for servicing of the loan.
MSRs are included in other assets in the accompanying condensed consolidated balance sheet as of December 31, 2009. MSR’s were carried at the lower of origination value less accumulated amortization, or current fair value. The net carrying value of MSRs was approximately $3.9 million at December 31, 2009.
Activity in MSRs for the nine months ended September 30, 2010 and 2009 was as follows (dollars in thousands):
For further discussion of activity in MSRs for the nine months ended September 30, 2010 and 2009, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-Interest Income” elsewhere in this Form 10-Q.
At September 30, 2010, the Company had four subsidiary grantor trusts for the purpose of issuing Trust Preferred Securities (TPS) and common securities. The common securities were purchased by the Company, and the Company’s investment in the common securities of $2.1 million is included in accrued interest and other assets in the accompanying condensed consolidated balance sheets. The weighted average interest rate of all TPS was 2.82% at September 30, 2010 and 2.79% at December 31, 2009.
During 2009, the Company exercised its right to defer regularly scheduled interest payments on outstanding junior subordinated debentures related to its TPS. At September 30, 2010, the Company had a balance in other liabilities of $3.2 million in accrued and unpaid interest expense related to these junior subordinated debentures, and it may not pay dividends on its common stock until all accrued but unpaid interest has been paid in full. Payment of dividends is also restricted by state and federal regulators (see Note 14). The Company has recorded and continues to record junior subordinated debenture interest expense in its statement of operations.
At September 30, 2010 the Bank had a total of $195.0 million in long-term borrowings from FHLB with maturities ranging from 2011 to 2017, bearing a weighted-average rate of 1.83% with $50 million maturing in 2011. In addition, the Bank had $98.0 million in off-balance sheet FHLB letters of credit used for collateralization of public deposits held by the Bank. The available line of credit with the FHLB is reduced by the amount of these letters of credit. Also, the Bank had $41.0 million of senior unsecured debt issued in connection with the Federal Deposit Insurance Corporation’s (“FDIC”) Temporary Liquidity Guarantee Program (“TLGP”) maturing February 12, 2012 bearing a weighted average rate of 2.04%, exclusive of net issuance costs and 1% per annum FDIC insurance assessment applicable to TLGP debt which are being amortized straight line over the term of the debt. (See Management’s Discussion and Analysis of Financial Results of Operation - “Liquidity and Sources of Funds” for further discussion).
The Company’s basic loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. The Company’s diluted loss per common share is the same as the basic loss per common share due to the anti-dilutive effect of common stock equivalents.
The numerators and denominators used in computing basic and diluted loss per common share for the nine months and three months ended September 30, 2010 and 2009 can be reconciled as follows (dollars in thousands, except per share data):
During the nine months ended September 30, 2010 the Company granted 770,750 stock options with a calculated fair value of $0.43 per option. The Company did not grant any equity grants for the nine month period ended September 30, 2009.
The Company used the Black-Scholes option-pricing model with the following weighted-average assumptions to value options granted for the nine months ended September 30, 2010:
The dividend yield is based on historical dividend information. The expected volatility is based on historical volatility of the Company’s common stock price. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant for periods corresponding with the expected lives of the options granted. The expected option lives represent the period of time that options are expected to be outstanding giving consideration to vesting schedules and historical exercise and forfeiture patterns.
The Black-Scholes option-pricing model was developed for use in estimating the fair value of publicly-traded options that have no vesting restrictions and are fully transferable. Additionally, the model requires the input of highly subjective assumptions. Because the Company’s stock options have characteristics significantly different from those of publicly-traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in the opinion of the Company’s management, the Black-Scholes option-pricing model does not necessarily provide a reliable single measure of the fair value of the Company’s stock options.
The following table presents the activity related to stock options for the nine months ended September 30, 2010:
As of September 30, 2010, there was approximately $0.4 million of unrecognized compensation expense related to nonvested stock options, which will be recognized over the remaining vesting periods of the underlying stock options.
During the nine months ended September 30, 2010, the Company granted 378,000 shares of nonvested restricted stock at a weighted-average grant date fair value of $0.57 per share (approximately $215,000). The nonvested restricted stock is scheduled to cliff-vest three years from the grant date.
The following table presents the activity for nonvested restricted stock for the nine months ended September 30, 2010:
As of September 30, 2010, unrecognized compensation cost related to nonvested stock totaled approximately $0.4 million. The nonvested stock is scheduled to vest over periods of three to four years from the grant date. The unearned compensation on nonvested stock is being amortized to expense on a straight-line basis over the applicable vesting periods.
The Company has also granted awards of restricted stock units (RSUs). A RSU represents the unfunded, unsecured right to require the Company to deliver to the participant one share of common stock for each RSU. There was no unrecognized compensation cost related to RSUs at September 30, 2010 and 2009, as all RSUs were fully-vested.
During the three months ended September 30, 2010 the IRS commenced a required examination of the Company’s 2009 tax year and December 31, 2009 income tax receivable of $43.3 million. In connection therewith, and in completion of the 2009 income tax examination, the Company settled with the IRS’ field examiner and recorded a provision for income taxes of $1.1 million for the three months ended September 30, 2010. The provision for income taxes of $0.5 million for the nine months ended September 30, 2010 also reflects adjustments to the 2009 income tax receivable. During the three month and nine month periods ended September 30, 2009, the Company recorded income tax benefits of $9.7 million and $31.4 million, respectively, as management believed at that time that it was more likely than not that such benefits would be received. Effective December 31, 2009, management determined that there should be a 100% valuation allowance against the Company’s net deferred tax assets.
As of September 30, 2010, the Company maintained a valuation allowance of $37.4 million against the deferred tax asset balance of $36.3 million, for a net deferred tax credit of $1.1 million. This amount represented a $0.1 million increase from year-end 2009 due to an increase in gross unrealized gains in the Company’s investment portfolio during the nine months ended September 30, 2010. The Company’s future net deferred tax asset or liability will continue to be impacted by changes in the gross unrealized gains/losses on the Company’s investment portfolio. For discussion of the Company’s deferred income tax assets see “Critical Accounting Policies – Deferred Income Taxes” included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2009.
GAAP establishes a hierarchy for determining fair value measurements, and includes three levels based upon the valuation techniques used to measure assets and liabilities. The three levels are as follow:
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value. In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally-developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes that the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the condensed consolidated balance sheet date may differ significantly from the amounts presented herein.
The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to valuation hierarchy:
Investment securities: Where quoted prices for identical assets are available in an active market, investment securities available-for-sale are classified within level 1 of the hierarchy. If quoted market prices for identical securities are not available then fair values are estimated by independent sources using pricing models and/or quoted prices of investment securities with similar characteristics or discounted cash flows. The Company has categorized its investment securities available-for-sale as level 2, since a majority of such securities are MBS which are mainly priced in this latter manner.
Impaired loans: A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair market value of the collateral. A significant portion of the Bank's impaired loans are measured using the estimated fair market value of the collateral.
OREO: Management obtains third party appraisals as well as independent fair market value assessments from realtors or persons involved in selling OREO in determining the estimated fair value of particular properties. Accordingly, the valuation of OREO is subject to significant external and internal judgment. Management periodically reviews OREO to determine whether the property continues to be carried at the lower of its recorded book value or estimated fair value.
At September 30, 2010 and December 31, 2009, the Company had no financial liabilities measured at fair value on a recurring basis. The Company’s financial assets measured at fair value on a recurring basis at September 30, 2010 and December 31, 2009 are as follows (dollars in thousands):
Certain non-financial assets are also measured at fair value on a non-recurring basis. These assets primarily consist of intangible assets and other non-financial long-lived assets which are measured at fair value for periodic impairment assessments.
Certain assets are measured at fair value on a nonrecurring basis (e.g., the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments when there is evidence of impairment). The following table represents the assets measured at fair value on a nonrecurring basis by the Company at September 30, 2010 and December 31, 2009 (dollars in thousands):